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Development of Synthetic Diamond Derivative Products

Development of Synthetic Diamond Derivative Products. Vickie Flores, Adrian Mulryan Private Investor Products (“PIP”), Structured Products. Agenda. About structured derivative products and the addition of diamonds Development of a new derivative and structured product

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Development of Synthetic Diamond Derivative Products

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  1. Development of Synthetic Diamond Derivative Products Vickie Flores, Adrian Mulryan Private Investor Products (“PIP”), Structured Products

  2. Agenda • About structured derivative products and the addition of diamonds • Development of a new derivative and structured product • The contractual framework and legal issues • The role of diamond products in portfolio diversification • Recent examples, issues and developments • Further information • Questions?

  3. About Structured Derivative Products • Synthetic investment instruments • Exchange traded and OTC • Cheaper and easier alternative to direct investment • Structured product types (performance tracking, yield enhancement, leverage, capital protection) • Wide range of structured product underlyings across all asset classes

  4. Who Buys a Structured Product? Who? • Individual retail investors • Corporate and commercial investors • Private Bankers • Asset Managers (to assist with asset allocation) • Financial Product Distributors/Advisors

  5. Why Buy a Structured Product? Why? • Access to otherwise inaccessible markets or pay offs • Portfolio diversification • Cost efficient for the investor • Tax efficiency or mitigation • Enhanced yield or protection

  6. How diamonds would fit with the existing ABN Amro structured products range • Proven demand for commodity and alternative underlyings from investors and asset allocators • Limited correlation with existing underlyings • New, exciting and previously inaccessible underlying • Removes the need for storage, insurance and security • Bullish view of diamond prices held by many • High profile in current financial press

  7. Problems in Developing a Structured Product • Price transparency and agreed price sources • Standardisation of underlying assets (stones) and agreed valuation methodology • Identification of demand for rough vs polished diamonds • Disruption events These same issues apply to developing a diamond derivative contract

  8. Requirements to develop a new Derivatives Contract • Willingness from market participants • Backing of financiers to the industry e.g. ABN Amro Bank NV for diamonds • Standardisation of documentation and delivery mechanism • Facilitator to standardise documentation e.g. ISDA • Working group of interested parties • Regular reporting to industry through existing mediums, trade press and web sites

  9. Characteristics and Considerations for a Derivative Product • 2 Distinct groups: OTC and Exchange Traded • 3 Major classes: Forwards/Futures, Options, Swaps Considerations in developing of a Diamond Derivative Contract: • Contract terms and specification • Delivery mechanism – cash or physical settlement • Depository and verification by gemologist • Legal documentation (ISDA) • Direct settlement / central clearing (margining)

  10. Contractual Framework • What is a Derivative? • ISDA • Master Agreements & Definitions • Benefits of Derivatives • Access to Derivatives • Types of Retail Structured Product

  11. Legal Issues • Challenges – Hedging – Polished vs. Rough • Timing • Product Types • Settlement

  12. How synthetic diamond products can assist with portfolio diversification • Historic traditional portfolios contained 3 asset classes (stocks, bonds and cash) • Benefits of portfolio diversification across asset classes increasingly recognised: • Maximised returns for minimised risk • Reduced volatility during both bull and bear markets • Full analysis required, but correlation with existing commodities expected to be fairly low • Increasing demand from investors for “alternative investments” not linked to bonds and stocks • Diamonds both a consumable and store-of-value asset so particularly suitable for portfolio diversification

  13. Recent Examples and Developments • The Development of a Freight Derivative Contract • Established market (1744) based on trust • Lack of trade standardisation, transparency and pricing • Development of OTC Forward Freight Agreement (“FFA”) contract • Introduction of Central Clearing • Adoption of ISDA (2005) • Launch of NYMEX futures contract • Similarities and differences with Diamonds • Lessons that can be learnt from freight derivatives • Launch of Diamond fund on the LSE by Diapason (10th July 2007) • High profile recent press articles

  14. Further Information on Structured Products • ABN Amro Markets Web Site • http://www.abnamromarkets.com • Structured Retail Products • http://www.structuredretailproducts.com

  15. Questions • Any Questions?

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